Agreement With Airbus For Supply Of Aerospace Parts Is Positive For Alcoa's Business

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Alcoa ( AA ) has announced the signing of a deal worth about $110 million, to supply titanium and aluminum parts to aircraft manufacturer Airbus.

This deal shows that traditional producers of metallic jetliner parts are fighting back against competition from sophisticated composite materials which have gained favor among aircraft manufacturers in the recent years. For Alcoa, the deal is another way of growing its engineered products business, which has largely compensated for the company's lackluster showing in its primary aluminum sales business in a tough economic environment.

Alcoa already has agreements with Airbus for supply of various aluminum sheets, plates and hard alloy extruded products that utilize Alcoa's current, advanced-generation and aluminum lithium alloys.

We have a Trefis price estimate of $7 for Alcoa , which represents 25% downside to the market price.

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What Will Alcoa Supply?

Alcoa will supply titanium parts, including forgings used to connect the wing structure to the engine, for Airbus' A320neo, a single-aisle jet. It will also supply aluminum forgings for the A330 and A380 models. One of these forgings is the A380 inner rear wing spar, which is the largest aerospace forging in the world. Alcoa is  well-equipped to supply this particular part as its proprietary 7085 alloy is intended specifically for manufacturing large structural aircraft components. Many of the forgings that Alcoa will supply connect the wing structure of the jet to its body.

Why Would Airbus Prefer Metal Parts Over Composites?

Alcoa has identified automotive and aerospace markets as its key targets for supplying value-added products, and invested in design and development to meet their needs. In the aerospace market, it has been observed that manufacturers are gravitating more towards composite materials these days, which are both stronger and lighter than traditional metals. To counter this competition, Alcoa has invested in developing metal alloys with the same qualities. It claims that these alloys are easier to manufacture and repair than composites. Composite materials are generally made of carbon fiber reinforced with epoxy resin and are strong, lightweight and resistant to corrosion. However, their production can be complicated and expensive. In addition, fixing them once a plane is in service can be tricky. Moreover, advanced metal parts of the kind that Alcoa produces can be used as connectors for composite parts. While the traditional aluminum fasteners can react chemically with composites to produce avoidable dangerous consequences, those supplied by Alcoa don't react with plastics.

Alcoa says that it has invested heavily in modernizing a 50,000 ton press at its Cleveland facility and equipped it with sophisticated controls. This will enable the press to meet stringent specifications desired by the aerospace industry in producing large and complex titanium, nickel, steel and aluminum forgings. The company already supplies Airbus with aluminum sheet, plate and hard alloy extruded products utilizing its current, advanced-generation and aluminum lithium alloys. This is being done under an agreement worth $1.4 billion signed in 2012.

Is Alcoa Well-placed To Supply These Parts?

Over the years, Alcoa has invested heavily in developing alloys that are both stronger and lighter than traditional metals. One reason why it has been doing so is to focus on growing its value-added downstream businesses of supplying global rolled products and engineered products. The traditional bread-and-butter alumina and primary aluminum businesses of the company have become quite commoditized over the last few years. Also, the depressed global prices for aluminum arising out of chronic oversupply have dented its profits margins, while costs remain high. ((LME Aluminum Price Graph, LME))

In value-added products businesses, the prices for products are largely insulated from aluminum prices due to the specialized nature of these parts and presence of relatively few suppliers. In the first three quarters of 2013, Alcoa's global rolled products and engineered products businesses accounted for 57% of its total revenues and 79% of its after-tax operating income (ATOI). The aerospace business alone generated $3.8 billion in revenues for the company in 2012. This shows how important these lines of businesses have become in Alcoa's future scheme of things. ((Alcoa Reports Third Quarter Profit Driven by Strong Operating Performance, Alcoa News Release))

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AA , FCX , MT , RIO , X

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